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Alternative funds set for further growth

An EY survey finds the alternative funds industry has deftly navigated pandemic-related disruption and is now gaining new momentum.
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Over half (51%) of global investors surveyed report increasing value delivered by alternative fund managers in the last two to three years, with investors overwhelmingly indicating alternative products either met or exceeded their return expectations.

Along with this strong performance, 42% of alternative fund managers are seeking growth by turning to retail channels, which is changing the investor profile for the industry.

The survey was based on conversations with 210 managers and 54 investors globally, including in Greater China, Singapore and Australia in Asia Pacific.

“This year’s research really highlights the resilience of the alternative funds industry and the key transformations that managers and investors are working together to affect. Both globally and regionally, alternative fund returns were relatively strong throughout 2021, even as fund managers and investors addressed ongoing challenges posed by the Covid-19 pandemic,” Elliott Shadforth, EY Asia-Pacific wealth & asset management leader said in a statement.

Crypto, Spac and cross-over

Digital assets have become a mainstream trend, with the rise in popularity attracting the attention of alternative fund managers and investors. While only one in 10 managers reported having current exposure to cryptocurrencies, a quarter of hedge funds expect to increase their exposure in the coming year, according to the survey.

The special-purpose acquisition company (Spac) market was a similar phenomenon during the year, garnering the attention of retail and institutional investors alike. Among alternative managers, 37% of hedge fund and 28% of private equity managers indicated they participate or are considering participating in some capacity in Spacs.

Public-private crossover funds also continued to grow, as more traditional liquid hedge fund managers looked to get involved in private market opportunities.

ESG integration

The survey also showed that alternative fund investors are increasing their incorporation of ESG factors into investment decisions, with three-quarters saying their scrutiny of managers’ ESG policies has increased in the past two to three years.

“2021 was a year where the industry really embraced new and evolving investment opportunities and themes, leading to increased investment in the alternative fund space. The increased attention in this space is likely to be to the benefit of managers that prioritise ESG and to the detriment of those that do not,” EY Greater China wealth & asset management leader Christine Lin, said.

To this point, 39% of investors reported that they have either passed on investing in a manager due to insufficient ESG adoption or required the manager to make meaningful improvements to their ESG policies. Four in five investors said climate risk is a top ESG factor in their investment decision-making, with a majority indicating that it is one of the areas of increased focus this year. ​

“ESG considerations are becoming crucial to a fund’s future and how a diverse team and strong talent management is increasingly tied to performance – clearly shows that the alternatives funds landscape is in a time of significant transformation,” Shadforth said.

“Many of these themes are likely to dominate industry conversations for years to come, and fund managers will need to continue to adapt and evolve in order to drive the continued sustainability and growth of the sector,” he added.

Part of the Mark Allen Group.